Research Discussion Papers, Bank of Finland
No 2/2012:
Expectations-driven cycles in the housing market
Luisa Lambertini ()
, Caterina Mendicino ()
and Maria Teresa Punzi ()
Abstract: Survey data suggests that news of changes in business
conditions are significantly related to house prices and consumers' beliefs
of favorable buying conditions in the housing market. This paper explores
the transmission of "news shocks" as a source of boom-bust cycles in the
housing market. News on shocks originated in different sectors of the
economy can generate booms in the housing market in accordance with the
average behavior in the data; expectations on monetary policy and in
inflationary shocks that are not fulfilled can also lead to the observed
subsequent macroeconomic recession. Investigating the role of the credit
market for house market fluctuations we find that favorable credit
conditions that are expected to be reversed in the near future generate
boom-bust cycle dynamics in line with the most recent episode. Further,
credit conditions also affect boom-bust cycles generated by news shocks
originated in other sectors of the economy. In particular, lower
loan-to-value ratios reduce the severity of expectations-driven cycles and
the volatility of household debt, aggregate consumption and GDP.
Keywords: boom-bust cycles; credit frictions; housing market; (follow links to similar papers)
JEL-Codes: E32; E44; E52; (follow links to similar papers)
40 pages, January 11, 2012
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